Rules for Rolling Over Inherited IRA Assets

An inherited IRA can be a nice windfall. As an IRA beneficiary, you need to be aware of the differences between a retirement account you inherit and one that you set up for yourself. Your choices affect how and when you pay taxes on the money and your goals for your inheritance.

Inherited IRA Taxes

Unless you are the spouse of the original owner of the IRA, the tax rules are set up to get the money coming out of the IRA so that taxes will be paid. A spouse has the right to change the IRA into her name and have all of the rights of an original IRA owner. Non-spouse beneficiaries must choose from several options concerning withdrawals from the inherited IRA. Withdrawals from a traditional IRA will be taxable income to the beneficiary for the year the withdrawal was taken. The money coming out of a Roth IRA is tax-free as long as the deposits have been in the account at least five years.

Beneficiary IRA

An IRA left to a non-spouse recipient will be classified as a beneficiary IRA. Both the beneficiary and the original owner must be listed on the ownership line of the account. The beneficiary IRA money must remain separate from other IRA accounts the beneficiary may have. If you inherited money from more than one IRA from the same original owner, the inherited retirement money can be combined into a single beneficiary IRA account. If you don't follow the IRA beneficiary setup rules, you could cause the inherited IRA to become fully and immediately taxable.

Transfer Instead of Rollover

An IRA transfer occurs when the account money moves directly from custodian to custodian. A rollover is when the IRA owner takes possession of the IRA proceeds and deposits the money into another IRA account. With a beneficiary IRA, taking the money to roll it over means the money will be immediately taxable to the beneficiary. If you want to move a beneficiary IRA to another account or custodian, use the transfer process. You can transfer a beneficiary IRA as often as you want as long as you maintain the ownership listing and do not try to roll it over.

Withdrawal Options

A non-spouse beneficiary must choose between two options to start withdrawing and paying taxes on the inherited IRA money. The lump sum option gives the beneficiary up to five years after the original owner's death to withdraw the full amount. Withdrawals can be made at any time and in any amount during the five-year period. The second option is to take minimum annual distributions based on the beneficiary's life expectancy. With this option, the beneficiary will receive an annual payout from the inherited IRA for the length of her IRS-calculated life expectancy. The minimum distribution choice must be made by the end of the year after the year the IRA owner died.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.